startup finance-a entrepreneur manual

7/30/2019 startup finance-a entrepreneur manual

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Startup Finance

An Entrepreneurs Manual
http://www.carsonworkshops.com/index.html


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About Index Ventures

Over 1.5bn under management

Active investor in web / internet

Pan European Venture Fund

Based London & Geneva

Index Ventures

Selected Investments


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A big undertaking

Starting a business is a big commitment

Energy & Passion Time

Financial resources (yours and your investors) Before thinking of financing, is worth

taking a deep breath


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Key questions about you

Why am doing this

Make money Lifestyle

Change the world How long do you want to commit?

What level of financial risk are youprepared to take?


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Key questions about the business

Be honest with yourself about the risks /unknowns

Do customers want the product / service?

Do you have the competence to build theproduct and the team

Can you monetise the product / service? How competitive is / will the space be? How big can the overall market become?


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Agenda

What are the financing options?

How to attract and engage investors?

Deal structure and what to expectduring the investment process

Important reflections before you start


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Overview of financing options

Angel Financing

Venture Capital

Private Equity

PublicStock Markets

Self Finance /Bootstrapping

Debt /Bank Finance

Equity FinancingNon-Equity Financing


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Self financing / bootstrapping

Financing growth from previous cashflow and personalfunds

Obviously need to have cashflows

Most good bootstrapped companies emerge from a service

or consulting companies that are productising their offering

Pros

Bootstrapped companies almost always spend cash moreeffectively than equity financed companies

Already being close to existing customers, give excellent

ability to understand problems and define good solutions

Cons

Resources for product and market dev constrained bycashflows

May miss a big opportunity if other players raise finance and

invest heavily


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Debt / bank finance

Relatively limited funds will be available ;likely to want security anyway

Banks only lend to predictable businesses

they can understand If your capital requirements are limited

and your business is following a welltrodden path, can be a useful source of

finance

Not particularly useful web or high growthtech industries


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Large PotentialMarket

Opportunity

Unique ProductOr Concept

PassionateFounding Team

Pre-requisites

Intensecompetition

likely

Need to moverapidly

Implications

Hiring

Infrastructure

VC funding supports

Rapid ProductDevelopment

Internationalisation

Partnerships

Commercialisation

Good reasons to raise equity finance


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When NOT to raise VC

Applicationis a feature

not a product

Market size istoo small

Motivation isnot financial

Risk is not that you waste time unsuccessfully tryingto raise finance

real danger is that you do succeed in raising VCfunds

Lose opportunity for small exit which could be

personally lucrative Lose opportunity to run lifestyle business Get bound in to 3+ yrs work you may not enjoy


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Equity Financing

SeedEarly Stage

Series A, (B)Later Stage(B),C,D

Pre-IPO /Buy-out

PrivatEquity

InvestmentSize

PotentialSources ofFunds

0 - 1m

Grant-funding

University seedfunds

Friends andfamily

Angel Investors

(VentureCapital)

2m-20m

VentureCapital

(Wealthy)Angelinvestors

5m-20m

VentureCapital

30m+

Specialist Latestage techinvestmentfunds

Hedge Funds

Growth Fund


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Agenda


How to attract and engage investors




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Venture Capital How the VC makesmoney

Raise fund every 2-4 years Pension funds, financial institutions and specialist fund of

fund investors

Invest money over 3-5 years

~ 1/2 of investments lose money~ 1/3 of investments break even~ 1/6 of investments make (lots) of money

Very small management fee on funds managed

~ 1-2.5% pa

Carry

~ 20-25%x (Total Return Total Amount Invested)


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Angels How the Angel investor makesmoney

Unlike the VC the Angel invests their own money

Much smaller absolute returns can be very meaningful to an angel

The Angel approach is to invest small amounts at a very earlystage / low valuation

50-250k at valuations of500k-4m

Two exits for angel

Firm might be sold quickly for 5-10m or less where the Angel canmake 2-5x money

Firm raises VC money, after which Angel typically becomes morepassive but has built up exposure very cheaply to a venture backedenterprise

The key thing when selecting an Angel therefore is whether theycan help you raise VC finance

See which Angel investors have invested with which VCs


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Advice and Strategy

Hiring

Developers Country Managers

Sales CEO / CFO / COO Advisory Board

Partnerships

Profile and PR

Further access tocapital

Internationalisation

Trusted serviceprovider relationships

Search / recruiting

Branding / PR

Finance, etc

Exit optimisation

Knowledge / contactswith relevant buyers

Experience with process

Venture Capital What a good VC willadd


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What does an investor look for?

Technology Traction

Can evaluate each as

Exceptional Good / credible Mediocre / incomplete

Misconception that being good / credible across the board iswhat VCs look for

Can always add credible attributes to the mix later

We focus on finding opportunities which rate as exceptional inone attribute

Team


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Identifying relevant VC partners

Has fundsto invest

Match ofSize/Stage/Geography

RelevantPortfolio

No directlycompetitiveinvestments

Excellenttrack record

Shortlist

Do create a shortlist

Rifle is a better weaponthan a shotgun

Similar process foridentifying angels, look atVC funding press releases toidentify prior Angelinvestors


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Getting on radar screens

Out of the blue email is a longshot

Try to build context

Analyse portfolio companies are there any links

there? Analyse contact network and advisors Analyse press coverage Participate in blog conversations Attend events and conferences

Relevant PR around product also helps

VCs spend their time looking for businesseswith momentum


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Agenda


How to attract and engage investors?




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Sharing relevant information

100 page business plannot required

20 page ppt whichclearly answers mainquestions is best bet

Product

Market Business Model Team Competition Product Roadmap Technology Overview Business Development Financial Status

Pre - first meeting Pre - termsheet Post - termsheet

Dialogue rather thandocumentation expectlots of meetings

Calls with current /prospective customers or

partners Meeting broader team

Brainstorming aroundstrategy

Identifying key hires postclosing

Formal presentation toVC partnership

Some additionalreference calls withpartners / customers

Personal reference calls

Legal / accounting audit

(if relevant)

Drafting legaldocumentation

2-4 weeks 1-2 Months


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Types of investment

Ordinary Share investment

Simplest form, often used by angels All shareholders have similar rights Company Board composed according to

Convertible Loan

Sometimes used by both Angels and VCs Typically when another financing is anticipated soon Loan will convert (with a discount ~25%) into the next

financing round

Preferred Share Investment

Typical Structure used by VCs and occasionally larger Angelsinvesting as a group

U d t di t h t


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Understanding a termsheet case study

Anything between 2 and 15 pages (if points arespelt out in fuller legalise)

Sample phrasing is [XXX fund]proposes to lead a Series A preferred share financing

of5m at a8m pre-money valuation. As part of the investment

process an employee option pool of 15% on a post money basis will

be put in place.Typical venture capital terms including

participating liquidation preference, etc. etc

What does it all mean?


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Case Study Cap Table


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Board Representation

Liquidation Preference

Participation rights

Anti-dilution rights

Element of reverse vesting Certain control and veto rights

Period of exclusivity to close legals

but thats sounfair

Photo Source: Philip Greenspun, MIT

Venture Capital Typical Deal Terms


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Case Study - liquidation preference

0

5

10

15

20

25

30

0 10 20 30 40 50 60 70 80

PayouttoSer

iesA(m)

Valuation of Company at Exit (m)

Types of Liquidation Preference

No Liquidation Preference

Non-Participating liquidation preference

Participating Liquidation preference

Participating Liquidation preference (capped at 3x)


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0

5

10

15

20

25

30

0 10 20 30 40 50 60 70 80

PayouttoSer

iesA(m)



No Liquidation Preference


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0

5

10

15

20

25

30

0 10 20 30 40 50 60 70 80

PayouttoSer

iesA(m)



Non-Participating liquidation preference


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0

5

10

15

20

25

30

0 10 20 30 40 50 60 70 80

PayouttoSer

iesA(m)



Participating Liquidation preference


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0

5

10

15

20

25

30

0 10 20 30 40 50 60 70 80

PayouttoSer

iesA(m)



Participating Liquidation preference (capped at 3x)


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Case Study - Antidilution

If a subsequent investment round is done a price lowerthan the previous investment round then the previousinvestment round is repriced (more stock issued to SeriesA)

Two flavours

Broad-based Series A price ratchets down based on size ofSeries B relative to Previous post-money valuation

Narrow-based Series A price ratchets down based on size of

Series B relative to Size of Series A

Say 5m Series B done at 0.75 per share

Broad-based Series A reprices = 1.00((5/(5+15.3)*0.25)= 0.93

Narrow-based Series A reprices 1.00((5/(5+5)*0.25) =

0.875


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Case Study Reverse Vesting

The value of startup istypically in the promise offuture labour from thefounders

Investors seek to secure this

by reverse vesting founderstock, typically over 3 or 4years

For startups typically allfounder stock is subject toreverse vesting.

For later stage companiesperhaps half the stock mightbe subject to vesting

NB this also protectsfounders from each other

Choosing the right VC Valuation should


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Value at exit

Probability of gettingthere

% share of businessat exit

Entrepreneurs Equation Revenues / Profitability

Growth rate

Team quality

Strategic fit with buyer community

Well managed exit process

Fewest strategic errors made

Hiring (quality & speed)

Partnerships

Product development

Valuation at initial round

Valuation and dilution atsubsequent rounds

Option grants

Choosing the right VC - Valuation shouldnot be the decisive factor

Key things to consider when choosing an


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Key things to consider when choosing aninvestor

Right partner at a fair

pricevs.

Any partner at bestprice

Relationship With key individual(s); and broader team

References

Speak to other founders

Portfolio Relevant experience Non competitive Community you want to be part of

Valuation and associated deal terms


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Thank you

Ben Holmes

Email: [email protected]

Skype: ben_holmes


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Artwork (Transparent Layers)

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